100 years of government borrowing

There is speculation that the Chancellor is considering the issue of 100 year bonds in order to borrow money at current historically low rates.

He might even announce perpetual bonds in his Budget speech this time next week.

The last time Britain issued perpetual bonds was following the first world war. These continue to be paid at the rate of 3%, making it cheaper for the government to continue paying the coupon than redeeming the entire debt.

The cost of borrowing from the UK government is currently at around 2% for a 10 year gilt. This is the lowest cost of UK government borrowing since the 19th century.

Chancellor George Osborne plans to ask the Debt Management Office to consider whether extending the length of government bonds (Gilts) is viable.

The aim in issuing these very long term government bonds is to reduce the cost of borrowing for future generations, by ‘locking in’ the current low cost of borrowing.

The various political parties are likely to view the plan as a sign of strength or weakness in the UK economy.

It will be very interesting to see if the Budget results in the introduction of x% Treasury Gilt 2112. The bigger question is whether any investor would consider these a wise addition to their portfolio.

Photo credit: Flickr/HM Treasury